Download Property Sector Stable Despite Slowdown

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Property Sector Stable Despite Slowdown
Analyst: Yogie Surya Perdana
PEFINDO is of the view that the outlook for the property sector will remain stable in the near to medium
term, despite its slowdown during the first half of 2015 (1H2015). This is underpinned by the country’s
backlog of roughly 15 million units in 2014, its young demographics and the expanding middle class
segment. These factors will continue to drive demand for residential properties, with first home buyers as
the largest market. We expect growth in property development on the outskirts of Jakarta - Tangerang,
Bekasi, Depok and Bogor - will continue given the urbanization trend and affordability. This is also expected
to increase demand for retail and commercial properties. Our view is further supported by the government’s
infrastructure spending, including the development of new toll roads and transportation systems, to better
connect cities to the capital. We also expect greater exposure from developers to secondary cities Bandung, Surabaya, Medan, Balikpapan and Makassar - given the scarcity of residential land bank in Jakarta
and the opportunities these cities will provide over the medium to long term.
Nevertheless, the slowing economy, rupiah depreciation against the US dollar, weakening purchasing
power, and policy uncertainties weakened demand during 1H2015, with most of the sales of property
developers lagging behind their targets. PEFINDO also notes that the Eid Al-Fitr festivities and school
holidays, both in July, contributed to the weakening market as buyers delayed purchases amid the slowing
economy. As a result, several developers have changed their strategies, adjusting their property portfolios,
product price segmentation and unit size to meet market demand, rescheduling their property launches for
the second half after July.
PEFINDO considers the following four factors will be key catalysts to a more favorable climate in the sector
over the near to medium term: tax regulations imposed on property products are now set and clear;
relaxation of the foreign ownership law over the next couple of months; relaxation of the loan-to-value
(LTV) regulation; and government disbursement on infrastructure spending, which is expected to improve
economic growth and purchasing power.
Table 1. 1H2015 marketing sales (IDR billion)
Company
PT Bumi Serpong Damai Tbk
PT Lippo Karawaci Tbk*
PT Ciputra Development Tbk*
PT Summarecon Agung Tbk
PT Agung Podomoro Land Tbk
PT Alam Sutera Realty Tbk*
PT Pakuwon Jati Tbk*
PT Modernland Realty Tbk
PT Intiland Development Tbk
Aggregate
1H2015
3,600
2,700
4,300
2,700
1,583
1,165
2,000
2,062
497
20,607
1H2014
2,750
1,639
3,360
2,400
2,466
2,500
1,100
1,800
1,181
19,196
Source: PEFINDO database, company reports and news
% y-o-y % of 2015
change
target 2015 [E]
30.9
48.0
7,500
64.7
45.0
6,000
28.0
41.3
10,640
12.5
49.1
5,500
-35.8
24.4
6,500
-53.4
20.1
5,800
81.8
58.7
3,410
14.6
38.0
5,423
-57.9
16.5
3,002
7.4
38.5
53,535
2014
6,508
5,185
8,631
4,601
6,022
4,256
3,137
3,651
2,359
44,350
2013
7,348
4,116
8,941
3,725
6,027
3,814
3,003
2,900
2,369
42,243
2012
4,280
4,683
7,298
3,873
5,800
3,648
1,851
1,088
1,650
34,171
* not rated
Set and clear property tax revisions
New tax regulation, No. 90/PMK.03/2015 released April 30, 2015 by the Ministry of Finance, and effective
May 31, 2015, is the revision of regulation No. 253/PMK.03/2008 regarding super luxury income tax (PPh
22). The new regulation imposes a 5% tax on buyers of properties valued at more than IDR5 billion or with
a size of at least 400 square meters (sqm) for houses and 150 sqm for apartments/condominiums.
Previously, the super luxury tax threshold for property was IDR10 billion, and at least 500 sqm for houses
and 400 sqm for apartments/condominiums. It is also clear that the IDR5 billion threshold should exclude
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the 10% VAT (PPN) and 20% luxury tax (PPnBM). The 5% super luxury tax on property purchases could
be treated as a tax credit for the individual's total annual income tax (SPT PPh 21).
For the luxury tax itself, under new regulation No. 106/PMK.10/2015, released June 8, 2015 and effective
July 8, 2015, it was finally agreed that the 20% tax imposed will still be based on property size and not
pricing, which is at least 350 sqm for houses and 150 sqm for apartments/condominiums. Previously, it
was said that the luxury tax would be imposed based on pricing, with the threshold believed to be IDR3
billion, given that the current super luxury tax threshold is IDR5 billion. However, recent news in the media
suggests the government still plans to impose the luxury tax based on property value, with the threshold
expected to start from IDR10 billion. If the regulation is to be imposed, we believe it will not significantly
impact property players given their small exposure to properties valued above IDR10 billion. With property
tax regulations now clearer, this allows the sector to settle in and recover in the medium term from the
lingering uncertainties it suffered during the first half.
Table 2. Current tax structure for luxury property
Description
Property base value
VAT (PPN)
Duty on the acquisition of land and building rights
(BPHTB)
Land and building transfer tax
Luxury tax (PPnBM)
Super luxury tax (PPh 22)
Total price paid by customer
In %
100%
10%
5%
5%
20%
5%
145%
An additional 45% of
transaction costs to
acquire property in
the primary market
Source: PEFINDO and Ministry of Finance
Foreign ownership on the horizon
According to the media, the government is expected to relax property ownership rule for foreigners over
the next few months, indicating that it will revise the current regulation No. 41/1996 on housing or
residential ownership for foreign citizens based in Indonesia. Media reports say the relaxation will allow
foreigners with a presence in Indonesia to own luxury apartments in big cities with a minimum value of
IDR5 billion. Under the current regulation, foreigners can only have a property holding a right of use
certificate that will lapse in 25 years and can be extended twice for another 20 and 25 years. The new
policy is expected to eliminate the period restriction and will allow foreigners to bequeath the property to
their heirs or resell it. Still, they are not entitled to the right of ownership certificate or freehold. We
emphasize that the IDR5 billion threshold is not yet confirmed, but we do expect there will be a minimum
floor price to distinguish the foreign customer market from that of local buyers.
The relaxation on foreign ownership is also to accommodate the goals of regional economic integration set
for the ASEAN Economic Community (AEC), which will commence at the end of the year. In comparison,
Thailand has allowed foreigners to purchase apartment/condominium freeholds without restrictions, but
only in a building where more than 51% of the total number of units are Thai owned, otherwise a foreigner
can only buy a leasehold. In Malaysia, foreigners are allowed to buy freehold landed properties and highrise condominiums in key areas, such as Johor, Penang, and Klang, and are subject to a minimum threshold,
which varies in different states, while for leasehold titles, most are originally for 99 years and can be
extended on paying a further sum. Malaysia has also encouraged foreigners to own property under the
Malaysia My Second Home program since 2002. The program has several requirements, which include a
minimum monthly income, minimum liquid assets, and a fixed deposit. Singapore, on the other hand, has
no price threshold but requires government approval for the purchase of restricted properties, while for
apartments/condominiums, foreigners can buy a leasehold for a period up to 90 years. Recently in Vietnam,
the government eased the policy on foreign ownership of properties similar to that of Thailand. The new
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law, in place from July 1, 2015, allows foreigners with valid residence visas to buy up to 30% of the total
number of units in an apartment building and up to 250 residential houses in a ward administrative unit.
In addition, foreign individuals who are married to a Vietnamese are entitled to long term home ownership.
PEFINDO is of the view that the easing on foreign ownership of properties could broaden the customer
base for premium apartments and help boost growth in the sector, though not significantly. The move is
expected to benefit property developers with high exposure to premium apartments under our coverage,
such as PT Intiland Development Tbk (idA/Stable) and PT Agung Podomoro Land Tbk (idA/Negative). Outside
our rating coverage, PT Ciputra Development Tbk, PT Lippo Karawaci Tbk, and PT Pakuwon Jati Tbk are
expected to be the main beneficiaries of the foreign ownership relaxation, in our view.
Figure 1. Proportion of property products priced above IDR5 billion
Mainly from 1Park
Avenue Apartment
project (The
Hamilton Tower)
Source: PEFINDO database, companies report, and news
* Not rated
Relaxation of LTV to stimulate property growth in the medium term
The central bank (BI) has released regulation No.17/10/PBI/2015 regarding the relaxation of LTV for
mortgages to revise circular No. 15/40/DKMP. First, second, and third mortgages are eased by 10% to
80%, 70%, and 60%, respectively. But, only banks with a non-performing loan (NPL) ratio of less than 5%
are allowed to sell mortgages under the new ratio. The average NPL ratio of the banking industry as per
July 2015 was 2.7%. BI did not change the mortgage disbursement terms from banks to developers. First
mortgages are still disbursed on a percentage of completion basis, while second mortgages onwards are
disbursed when construction is completed.
PEFINDO believes that the lower down payment requirements could stimulate growth, particularly in the
middle class primary home market, which bodes well for the country’s young demographic profile and
expanding middle class segment. However, it is likely that the relaxation will not impact property sales
straightaway, given the current slowing economy and more cautious consumer spending. We expect the
impact to be felt in 4Q2015 or 1Q2016 at the latest, given our expectation of an improved economy and
lower mortgage rates. In 2014, only 25% of developers’ customer profiles were financed by mortgages.
Within our coverage, PEFINDO notes that the lower LTV ratio is expected to benefit PT Bumi Serpong
Damai Tbk (idAA-/Stable) and PT Modernland Realty Tbk (idA/Stable), as these two companies have the
largest exposure to mortgage facilities relative to their peers.
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Table 3. Current LTV policy (BI regulation No. 17/10/PBI/2015)
Property Type
Landed House
>70 sqm
22-70 sqm
<21 sqm
Apartment
>70 sqm
22-70 sqm
<21 sqm
Shop houses
1st Mortgage
2nd Mortgage
3rd Mortgage
80%
n.a
n.a
70%
80%
n.a
60%
70%
n.a
80%
90%
n.a
n.a
70%
80%
80%
80%
60%
70%
70%
70%
Source: Bank Indonesia
Figure 2. Payment method composition based on 2014 presales
Source: PEFINDO database, companies report, and news
* Not rated
Government disbursement on infrastructure spending
The government has allocated about IDR290 trillion (USD21 billion) for infrastructure spending based on
the 2015 revised state budget, a 60% increase on 2014. However, up to June 30, 2015, its absorption rate
was less than 10%. This was mainly due to severe bureaucratic issues, including land disputes, and political
struggles between the ruling coalition and the opposition camp in the House of Representative. PEFINDO
is of the view that government spending is key for economic improvement in the second half of 2015. The
slower than expected economic growth in 1H2015 is expected to put pressure on the government to
accelerate its infrastructure spending. In the past, a large portion of the state budget was spent during the
fourth quarter or by year-end. Nevertheless, PEFINDO expects spending will likely come earlier than usual
with the government’s commitment to boost economic growth. The latest update is that the government
plans to issue a presidential decree to speed up budget disbursements.
This, in our view, will improve economic growth to 5% during the second half of 2015 from 4.7% during
1H2015 (1H2014: 5.1%) as it will create a multiplier effect in the economy, and in turn improve purchasing
power and domestic consumption over the medium term. It will eventually improve related industries,
including the property sector. However, a downside scenario remains as a large shortfall in tax revenue
could potentially lead to reduced spending. Tax revenue during 1H2015 reached IDR555.2 trillion, only
37.3% of the revised state budget.
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Figure 3. Indonesian infrastructure projects (% of targeted projects)
Source: Ministry of Public Works
Higher exposure to rupiah volatility
In recent years, more property developers entered the US dollar bond market to finance their expansion
programs, given the lower interest rates, increasing the average proportion of foreign currency
denominated debt to total debt to 45% as per June 2015, from 15% as of 2011. As all domestic transactions
are currently banned from using foreign currency, Indonesian property players cannot generate foreign
currency revenue for domestic transactions (existing USD contracts signed before July 1, 2015 will remain
valid). This could hamper their capital structure and cash flow protection measures with exposure to US
dollar denominated debt with no hedging activities when the rupiah depreciates against US dollar. To date,
the rupiah has depreciated more than 15% against the dollar from the beginning of the year, and by nearly
60% over the past five years. PEFINDO expects this volatility will continue in the second half following a
potential rate hike by the US Federal Reserve by end of year. We note that most players have partly hedged
their bond principals to minimize foreign currency risks. But, interest was left unhedged, raising funding
costs, thereby negatively affecting interest coverage.
Figure 4. Average foreign debt vs. local debt
Source: PEFINDO database
Conclusion
PEFINDO expects the majority of the credit ratings of property companies under our coverage to remain
the same in the near term, backed by their relatively large sales backlog which provides sufficient revenue
visibility for 2015-2016 and relatively stable EBITDA margins. However, we do expect revenue will grow at
a slower pace in 2016-2018 compared to prior years due to deceleration in presales in 2014-1H2015
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following a tighter mortgage policy issued by BI in September 2013, legislative and presidential elections
in 2014, and a weakening economy and policy uncertainty in the beginning of 2015. Generally, revenue
will be booked within 18-24 months of presales.
In addition, we anticipate there will be higher working capital needs following the new LTV ratio, with the
proportion of customers using mortgages expected to increase in the medium term. Besides LTV relaxation,
the new regulation also requires a guarantee from developers on top of the existing corporate guarantee
for properties still under construction, in the form of fixed assets, moveable assets, bank guarantees,
standby letters of credit (LC) and/or funds which are deposited and/or held in the bank lender’s escrow
account. This will pressurize developers’ cash flow, thus testing their balance sheet capability as they need
to finance the construction of the project upfront, internally or externally, as well as for collateral
requirements. We also expect high capital spending for land acquisition to continue, particularly in
secondary cities, given their rising prices and rapid economic development, with a large part expected to
be financed by debt. Early land banking allows property players to ensure sufficient profitability levels for
their future developments, in our view.
We anticipate a weakening in financial profiles, debt to EBITDA ratios in particular, in the near term, but
do not expect this to breach our downgrade trigger of 4.0x. The average debt to EBITDA ratio of property
companies under our coverage as of June 2015 was 3.0x. We project the average ratio at around 3.5x in
2015 and 3.0x in 2016.
Table 4. Rating comparison among peers (in IDR billion)
PT Bumi
PT
Serpong Summarecon
Damai Tbk
Agung Tbk
PT Agung
Podomoro
Land Tbk
PT
PT Intiland
Modernland Development
Realty Tbk
Tbk
PT Duta
Anggada
Realty Tbk
for the period ended
30-Jun-15
30-Jun-15
30-Jun-15
30-Jun-15
31-Mar-15
30-Jun-15
Adjusted assets
Inventory
Real estate assets
Adjusted debt
Adjusted equity
Sales
EBITDA
Net income
GPM [%]
EBITDA margin [%]
Debt/EBITDA [x]
DER [x]
FFO/debt [%]
EBITDA/interest [x]
Rating
34,600.4
5,712.1
8,330.6
7,460.6
21,249.7
3,367.1
1,798.3
1,415.3
74.6
53.4
*2.1
0.4
*40.7
8.6
idAA-/Stable
17,172.4
4,057.0
5,284.3
4,953.2
6,856.1
2,596.7
963.9
529.3
53.7
37.1
*2.6
0.7
*25.5
4.1
idA+/Stable
24,050.4
4,160.1
4,299.8
6,457.0
8,403.5
2,775.7
930.3
351.1
52.0
33.5
*3.5
0.8
*17.8
2.8
idA/Negative
9,844.2
818.3
4,343.3
3,797.8
4,040.0
1,413.6
551.9
215.3
53.8
39.0
*3.4
0.9
*13.2
2.4
idA/Stable
9,026.9
1,375.8
3,245.3
2,304.4
4,589.0
603.3
163.9
120.7
39.1
27.2
*3.5
0.5
*14.0
3.0
idA/Stable
5,324.5
527.9
329.0
1,516.8
3,384.7
561.3
231.3
141.2
45.7
41.2
*3.3
0.4
*20.6
2.4
idA-/Stable
Source: PEFINDO database, 2015
FFO = EBITDA – IFCCI + gross interest income – current tax expense
EBITDA = operating profit + depreciation expense + amortization expense
IFCCI = gross interest expense + other financial charges + capitalized interest; (FX loss not included)
MI = minority interest; * annualized
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